Key News

Asian equities cheered the Fed’s decisive action to shore up the financial system’s plumbing and particularly the fixed income market by buying bonds. The general feeling among brokers yesterday mid-afternoon was that Congress is fiddling while the US economy burns. A strong fiscal response from Congress appears to finally be in the works, which lifted sentiment. Korea was a performance standout gaining +8% while markets were broadly higher across the board though Singapore and Indonesia were off. Many Asian markets remain tremendously oversold. Thus, a bounce is overdue. While Premier Li cautioned that vigilance in containing the coronavirus is still needed, it was announced that Wuhan’s quarantine will be lifted April 8^th.

Autos had a good day on rumored policy support while materials were driven higher by gold stocks. It was announced Chinese movie theaters will be allowed to reopen in another sign of China’s progress in halting the coronavirus. CICC’s civil transportation index rose to 62% of its pre-Lunar New Year level, while the overall economy is running at 83% of its pre-Lunar New Year level. Commodity prices continue weakness despite the sharp equity rebound overnight. Freight logistics capacity utilization was off slightly to a 94% level day over day. We know that Q1 economic data will be off, though I am still optimistic that March data could surprise to the upside. It is surprising that estimates for March PMIs are in the 40 range after falling dramatically in February. It appears that Chinese economists share my views though their February estimates dramatically underestimated the fall in February.

Softbank (9984 JT) is shoring up its balance sheet, buying back stock and addressing shareholder concerns by selling up to $41B of assets including semiconductor company Arm Holdings and a portion of its $120B Alibaba stake. Alibaba’s shares in Hong Kong and the US were off upon the news of the sale Monday. Selling the rumored $20B stake would likely be at a discount to the current share price. We don’t know what price institutional investors would demand for the stake, which will be handled privately. However, overnight the size of sale was dialed down from $20B to $14B, which should help alleviate investor concerns. One positive is that Alibaba’s free-float market cap will expand thanks to these new shares coming into the market. This will lead to an increase in Alibaba’s weight within MSCI indices. I use MSCI China All Shares Index to track all three Chinese equity markets: Mainland, Hong Kong and US listings. The MSCI China Index, on the other hand, only has a small weight to Mainland stocks. The index is currently made up of 12% Mainland, 60% Hong Kong, and 28% US compared to the MSCI China All Shares Index’s more proportionate weightings of 42% mainland, 40% Hong Kong, and 18% US. Another issue is the over-weighting of Tencent and Alibaba at 17% an 14%, respectively, in the MSCI China Index compared of weightings of only 10% for both companies within MSCI China All Shares Index.

One potential positive for global equity markets is the rumored pension fund rebalance that may occur at quarter end due to losses in equities. It is assumed that pension funds will rebalance their portfolios by buying stocks to bring their allocation weight up. It is difficult to know if pension plans will, in fact, hit the rebalance button due to market conditions. However, the numbers being bounced around suggest that it could be significant and provide some buying for equities. Estimates for the extent of the rebalance vary between $200B to $300B. Also worth noting were rumors that yesterday was the strongest day ever for US individual investor selling. Brokers were discussing if this is an indicator of the bottoming process.

H-Share Update

The Hang Seng opened higher and never looked back +4.46%/+967 index points to close at 22,663 on flat volume. Breadth also flipped with all 50 constituents advancing and no decliners led by index heavyweights Tencent +4.94%/+120 index points, China Construction Bank +5.38%/+110 index points and AIA Group +3.9%/+86 index points. Three stocks rebounded more than 10%/+18 index points including pork giant WH Group +10.74%, Geely Auto +10.71%/+20 index points and China Unicom +10.29%/+8 index points. Today’s worst performer Shenzhou International +0.48%/+0.88 index points. China-domiciled companies gained +4.94% while Hong Kong-domiciled companies +4.26% using the HS China Enterprise and HS HK 35 indices as proxies. The Chinese companies trading in Hong Kong within the MSCI China All Shares Index gained +5.03% led by discretionary +6.97%, materials +5.91%, staples +5.9%, real estate +5.63%, tech +5.52%, communication +5.17%, health care +5.02%, financials +4.57%, industrials +4.27%, utilities +3.93% and energy +3.38%. Southbound Connect volumes were not as high as they have been lately nor were they accompanied by the outsized buying we’ve seen over the last several weeks. Buyers outpaced sellers 7 to 5 led by volume leader Tencent with modest buying relative to sellers, China Construction Bank saw 7 to 1 buying and Xiaomi saw 2 to 1 buying. Mainland investors bought $549mm worth of Hong Kong stocks today, which is about half of the amount we’ve seen recently. Southbound Connect trading accounted for 9.2% of Hong Kong’s turnover.

A-Share Update

Shanghai & Shenzhen’s respective gains of +2.34% and +2.1% were far from routine as they opened higher, plummeted mid-afternoon into negative territory before rebounding and closing just off the day’s highs. Volume picked up slightly +4% while breadth was very strong with 2,762 advancers and 920 decliners. Mega caps outperformed slightly though it was a broad rally across market capitalizations. The mainland stocks within the MSCI China All Shares Index gained +3.33% led higher by discretionary +4.65%, staples +4.29%, materials +3.82%, health care +3.69%, financials +3.49%, real estate +3.19%, utilities +2.78%, industrials +2.68%, energy +2.61%, tech +2.15% and communication +1.87%. Northbound Connect saw a divergence as Shenzhen’s volume exceeded Shanghai’s though Shanghai buying outpaced Shenzhen buying. MSCI inclusion stocks Kweichow Moutai and Ping An Insurance were both bought by small margins. Foreign investors bought $564mm worth of Mainland stocks today as Northbound Connect accounted for 5.1% of Mainland turnover.

Last Night’s Prices & Yields

Yields were largely flat on China treasuries while CNY saw some appreciation overnight.

• CNY/USD 7.06 versus 7.09 yesterday
• CNY/EUR 7.61 versus 7.65 yesterday
• Yield on 1-Day Government Bond 1.05% versus 1.05% yesterday
• Yield on 10-Year Government Bond 2.63% versus 2.63% yesterday
• Yield on 10-Year China Development Bank Bond 3.04% versus 3.03% yesterday